James Hardie Industries plc — Form 20-F Summary
Period note: The supplied filing is the annual report for the fiscal year ended 31 March 2016, not a standalone 2015 fourth-quarter filing. It does not provide a clear set of Q4-only financial results. Amounts below are in US dollars unless stated otherwise.
Business context and reporting period
James Hardie manufactures fiber-cement building products, principally for residential construction, repair and remodeling, and commercial applications. Its principal markets are North America, Australia, New Zealand, the Philippines and Europe. The audited consolidated statements are prepared under US GAAP. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $1,728.2 million | $1,656.9 million |
| Gross profit / margin | $632.2 million / 36.6% | $578.8 million / 34.9% |
| Operating income | $354.0 million | $335.0 million |
| Net income | $244.4 million | $291.3 million |
| Adjusted net income, non-GAAP | $242.9 million | $221.4 million |
| Operating cash flow | $260.4 million | $179.5 million |
| Cash used in investing activities | $66.6 million | $277.9 million |
| Cash used in financing activities | $154.4 million | $4.6 million |
- Sales rose 4%; gross profit increased 9%. Management attributed growth mainly to North American volume and higher Asia Pacific volume and local-currency pricing. A stronger US dollar reduced group sales by 4% on translation.
- Net income fell 16%, despite stronger underlying operating performance, primarily due to higher tax and interest expense and less favorable asbestos adjustments. Adjusted net income rose 10%.
- North America and Europe sales increased 9% to $1,386.3 million; segment operating income rose 19% to $340.6 million and its margin increased 2.2 percentage points to 24.6%. Asia Pacific sales declined 10% in US dollars to $341.9 million, mainly reflecting currency translation and the Australian Pipes sale; excluding Pipes, volume rose 6%.
- Cash and cash equivalents were $107.1 million, versus $67.0 million. Total assets were $2,040.4 million and total liabilities $2,265.6 million, leaving a shareholders’ deficit of $225.2 million.
- Net debt was $405.7 million, excluding the AICF loan facility. Debt included $190 million drawn under a $500 million revolving credit facility and $325 million of senior notes due 2023; the revolver matures in December 2020. The company reported compliance with debt covenants.
- Capital expenditure was $73.2 million, down from $276.2 million as major expansion projects neared completion. Cash dividends paid were $246.5 million; the company also repurchased $22.3 million of shares. Management reported $268.8 million returned to shareholders through dividends and buybacks.
Material changes versus the prior year
- Gross margin improved 1.7 percentage points, reflecting higher North American volume, lower unit costs and improved plant performance. North American operating margin rose; Asia Pacific’s reported US-dollar operating income declined.
- Operating cash flow increased $80.9 million, supported by higher earnings adjusted for non-cash items and a lower AICF contribution. Investing outflows fell as capacity projects wound down.
- Net interest expense rose substantially, partly because of the $325 million notes issued in February 2015. The effective tax rate increased to 26.1% from 9.7%.
- Asbestos adjustments provided a $5.5 million benefit in FY2016, compared with a $33.4 million benefit in FY2015. The actuarial undiscounted, uninflated central estimate of asbestos cash flows, net of insurance recoveries, declined to A$1.434 billion from A$1.566 billion.
Outlook, risks and unusual items
- Management expected moderate growth in the US housing market in FY2017. It expected Australian sales to outpace average growth in relevant housing and renovation markets, improved New Zealand results, and continued Philippines growth. No specific group revenue or earnings guidance was provided.
- The company anticipated an approximately $91.1 million AICF contribution on 1 July 2016, calculated as 35% of FY2016 free cash flow under the funding agreement. The funding obligation and the actuarial estimate are subject to significant long-term uncertainty.
- The gross asbestos liability was $1,302.2 million; the net unfunded AFFA liability, net of tax, was $766.7 million. The company warns that claim frequency, severity, legal developments, insurance recoveries and Australian-dollar exchange rates could materially change future estimates and cash requirements.
- New Zealand weathertightness claims were a $0.5 million expense in FY2016, versus a $4.3 million benefit in FY2015. The provision net of estimated recoveries was $1.8 million. Four claims filed in 2015 named the company’s subsidiaries as sole defendants; no class was certified in separate US product-related lawsuits.
- Other key exposures include reliance on construction markets and major customers, competition and pricing, raw-material and energy costs, currency and interest-rate movements, warranty and product-liability claims, environmental and safety rules, and execution or cost overruns on capital projects. The filing highlights OSHA’s revised crystalline-silica exposure limit, with compliance required for construction-industry participants by June 2017.
- Unusual or significant items included a $1.7 million gain on the Australian Pipes sale, the prior-year $4.2 million stamp duty charge, and volatile asbestos and tax adjustments. The company had no material off-balance-sheet arrangements or material capital commitments at year-end.
Important facts for investors to verify
- Confirm the intended period: this is FY2016 annual reporting, not a standalone 2015 Q4 filing.
- Review the full reconciliation and definitions for non-GAAP adjusted earnings, EBIT and margins.
- Assess the sensitivity of asbestos estimates and AICF funding payments, including the underlying actuarial assumptions and currency exposure.
- Verify debt balances, covenant headroom, revolving-facility availability and the effect of variable interest rates.
- Track North American housing demand and margins, Asia Pacific performance in local currency, and remaining capacity-project costs and commissioning.
- Review the status and potential exposure of New Zealand claims, US product lawsuits, warranty reserves and new silica-safety requirements.